Consumer Debt Collection FDCPA Traps for the Unwary Nationwide Lender Loan Servicer and Debt Collector Part I
In addition to the FDCPA, state laws regulating collection practices provide even greater protection for consumers than the federal law. The FDCPA provides that state laws and regulations that are more protective to the consumer are deemed not to be "inconsistent with," and therefore excluded from federal preemption by the Act.2 Therefore, compliance with the Act alone does not insulate nationwide debt collectors from potential liability, and state laws represent additional sources of potential class action liability. Part I of this article discusses the federal Act. Part II will discuss state laws regulating consumer debt collection practices.
The FDCPA, 15 U.S.C. §1692
Congress enacted the FDCPA for the stated purpose of prohibiting "abusive practices by debt collectors" in the collection of "consumer" debts. "Consumer debts" are defined as obligations or alleged obligations on the part of a "consumer" (defined as a natural person) "to pay money arising out of a transaction in which the money, property, insurance or services that are the subject matter of the transaction are primarily for personal, family or household purposes." 15 U.S.C. §1692a(3),(5). In its findings and purposes related to the FDCPA, Congress also declared that "abusive debt collection practices directly affect interstate commerce, even where they are purely intrastate in nature."
"Debt Collectors" Subject to the FDCPA
For the most part, the Act applies to "debt collectors" as defined in the Act, and not to "creditors" (defined as persons who offer or extend credit, creating a debt or to whom a debt is owed). However, the definition of "debt collector" includes creditors attempting to collect their own debts under other names. Assignees of debts of another, which are in default solely for the purpose of collecting them, also are excluded from the FDCPA's definition of "creditor" and instead treated as debt collectors.3
Application of subsection (c) to hold a creditor liable under the Act is illustrated in Nielsen v. Dickerson, 307 F.3d 623 (7th Cir. 2002). In Nielsen, the Seventh Circuit affirmed summary judgment in a class action against a credit card account creditor and an attorney it hired to send out thousands of collection letters that the court found falsely suggested that the attorney was actively involved in the creditor's debt collection efforts and would file suit if the debts were not paid. Because the attorney hired by the creditor to send out the collection letters essentially plugged information provided by the creditor into a form letter and was not otherwise actively involved in the debt collection process (calls from consumers in response to the letter were directed back to the creditor), the court applied subsection (c) to hold the credit card account creditor liable.
Attorneys may be "debt collectors" under the FDCPA. Heintz v. Jenkins, 514 U.S. 291 (1995); Nielsen v. Dickerson, supra; (lawyer who regularly tries to obtain payment of consumer debts through litigation is a person who "regularly collects or attempts to collect...debts owed" another, such attorneys were covered under the FDCPA); Scott v. Jones, 964 F.2d 314 the Fourth Circuit (4th Cir. 1992) (court found that the "principal purpose" of the defendant attorney's business was the collection of debts because at least 70-80 percent of the defendant's fees were generated in relation to work performed toward the collection of debts); Garrett v. Derbes, 110 F.3d 317 (5th Cir. 1997) (percentage of debt collection services is irrelevant if the volume of debt collection services is great enough; attorney who collected debts from 639 individuals over nine months "regularly collected debts," even though collection efforts accounted for just 0.5 percent of his overall practice); Fuller v. Becker & Poliakoff, 192 F. Supp. 2d 1361 (M.D. Fla. 2002) (homeowners' association attorneys who sent collection letters for delinquent maintenance assessments "regularly attempted to collect" consumer debts). Contrast Franco v. Maraldo, No. 99-3265, 2000 WL 288378 (E.D. La. Mar. 16, 2000) (attorney was not a "debt collector" under the FDCPA, as debt collection was not the "principal purpose" of his business; less than one percent of his practice involved the collection of debts on behalf of one client, and the attorney had only engaged in two collection matters).
Exclusions from the Definition
of "Debt Collector"
Expressly excluded from the term "debt collector" under the Act are:
- officers or employees of a creditor while, in the name of the creditor, collecting debts for such creditor;4
- persons acting as a debt collector for another person, related by common ownership or affiliated by corporate control, if the person acting as the debt collector does so only for persons to whom it is so related or affiliated and if the principal business of such person is not the collection of debts;5
- persons collecting or attempting to collect debts owed or due or
asserted to be owed or due another to the extent such activity:
- is incidental to a bona fide fiduciary obligation or a bona fide escrow arrangement;6
- concerns a debt that was originated by such persons;7
- concerns a debt that was not in default at the time it was obtained by such person;8 or
- concerns a debt obtained by such person as a secured party in a commercial credit transaction involving the creditor.9
The "bona fide fiduciary" exclusion. The exclusion from the definition of "debt collector" applicable to entities attempting to collect on the debt of another under a "bona fide fiduciary obligation" or "bona fide escrow arrangement" is illustrated in Pelfrey v. Educational Credit Management Corp., 71 F. Supp. 2d 1161 (N.D. Ala. 1999), aff'd., 208 F.3d 945 (11th Cir. 2000) (collection activities of guarantor of federal student loans fell within the "fiduciary obligation" exclusion of the FDCPA because guarantor had a fiduciary obligation to the government to pursue collection of the loan).
The "originator" exclusion. Applicability of "the originator" exclusion turns on whether or not the entity played a "significant role" in the transaction from its origination. Buckman v. American Bankers Ins. Co. of Florida, 115 F.3d 892 (11th Cir. 1997) (defendant bail bondsman played a significant role in originating bail bond transaction and therefore was excluded from FDCPA under the "originator" exclusion, 15 U.S.C. §1692a(6)(F)(ii)); Holmes v. Telecredit Service Corp., 736 F. Supp. 1289 (D. Del. 1990) (court rejected application of the "originator" exclusion to computerized check authorization and purchase service, which advised its subscribers whether to accept or decline the check based on the consumer's check-writing history and agreed to purchase check from the subscriber company if the check was not honored; while these activities may have facilitated the transaction between the consumer and the other corporation, the defendant did not participate in the exchange so as to warrant the "originator" exclusion).10
The "assignee of debt not in default" exclusion. Those attempting to collect debts obtained by assignment are treated as creditors, excluded from debt collector regulations under the Act, but only if the debt was not in default at the time it was acquired. Whitaker v. Ameritech Corp., 129 F.3d 952 (7th Cir. 1997) (defendant that acquired debts for long-distance telephone calls at the time the calls were placed, and before the customer was billed, excluded from the FDCPA under 15 U.S.C. §1692a(6)(F)(iii)).11
Whether Congress intended the "actual status" of the debt, or the assignee's understanding (or misunderstanding) of the default status of the loan for purposes of this exception, has been addressed by both the Second and Seventh Circuits. In Schlosser v. Fairbanks Capital Corp., 323 F.3d 534 (7th Cir. 2003), the assignee of a sub-prime mortgage attempting to collect on a mortgage it mistakenly believed was in default at the time it was acquired was sued for alleged violations of the FDCPA in connection with its collection letters. The Seventh Circuit rejected the assignee's defense that it was not a "debt collector" under the Act because the loan was not actually in default at the time of its acquisition, even though the assignee believed otherwise.12
The exclusion for debts obtained by a secured party in a commercial credit transaction involving the creditor. This exclusion is illustrated in Friedman v. Textron Financial Corp., No. 96-C-7983, 1997 WL 467175 (N.D. Ill. Aug. 12, 1997) (defendant who acquired and subsequently attempted to collect consumer accounts pledged as collateral under commercial loan was not a "debt collector" under the FDCPA).
Strict Liability; Maintenance of Procedures to Avoid Violations
The FDCPA is a strict liability statute. Thus, the intention of the sender of a prohibited communication is generally not relevant. The sole defense to a claim for violation of its provisions is a showing by the debt collector, "by a preponderance of the evidence, that the violation was not intentional and resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adapted to avoid any such error." 15 U.S.C. §1692k(c). Therefore, maintenance of procedures and policies intended to avoid violations may make a difference in liability under the statute, if it can be proven that the violation was unintentional.
Civil Liability and Administrative Enforcement
The Act provides for enforcement actions by the Federal Trade Commission, as well as a private right of action by those injured by violation of its provisions. In addition to actual damages of such violation(s), an individual plaintiff is entitled to "such additional damages as the court may allow, not exceeding $1000."13 This statutory penalty is per lawsuit, not per violation. Harper v. Better Bus. Servs. Inc., 961 F.2d 1561 (11th Cir. 1992).
In class actions, in addition to actual damages, each named plaintiff is also entitled to recover additional statutory damages not exceeding $1000, with the maximum recovery for additional damages for the class in total the lesser of $500,000 or one percent of the net worth of the debt collector."14 In determining the amount of statutory damages, the court must consider the frequency and persistence of the noncompliance by the debt collector, the nature of the noncompliance, and the extent to which such noncompliance was intentional.15 The Act also provides for recovery of attorneys' fees and costs to the consumer,16 and these are mandatory once actual or statutory damages are awarded. O'Connor v. Check Rite Ltd., 973 F. Supp 1010 (D. Colo. 1997) (no attorneys' fees awarded where no statutory or actual damages awarded). There is disagreement among the circuits as to whether the Act requires an award of actual damages before an award of attorneys' fees is appropriate. Nagle v. Experian Information Solutions Inc., 297 F. 3d 1305 (11th Cir. 2002).
Collection Practices Regulated by the FDCPA
Substantively, the FDCPA regulates practices of debt collectors in the areas of:
- acquisition of location information from third persons;17
- communications with consumers in collecting debts;18
- communications with third parties;19
- conduct deemed to be harassing, abusive or unfair;20
- communications that are false or misleading;21
- furnishing deceptive forms;22
- providing notice to the consumer and validation of debts.23
Conduct involving acquisition of location information from third persons. Under the Act, a debt collector communicating with persons other than the consumer for the purpose of acquiring location information about the consumer "shall":
- "identify himself, state that he is confirming or correcting location information concerning the consumer and, only if expressly requested, identify his employer";24 and
- shall not:
- state that such consumer owes any debt;25
- communicate with any such person more than once unless requested to do so by such person or unless the debt collector reasonably believes that the earlier response of that person was erroneous or incomplete and that the person now has correct or complete location information;26
- communicate by postcard;27
- use any language or symbol on any envelope or in the contents of any communication effected by the mails or telegram that indicates that the debt collector is in the debt collection business or that the communication relates to the collection of a debt;28 or
- communicate with the consumer once the debt collector knows the consumer is represented by an attorney, unless that attorney fails to respond within a reasonable period of time to communication from the debt collector.29
Communications with consumers in collecting debts. Under 1692c(a) of the Act, absent the prior consent of the consumer given directly to the debt collector or the express permission of a court of competent jurisdiction, debt collectors may not communicate with a consumer in connection with the collection of any debt:
- at any unusual time or place or a time or place known or which should be known to be inconvenient to the consumer (in the absence of knowledge of circumstances to the contrary, the debt collector shall assume that the convenient time for communicating with a consumer is after 8:00 a.m. and before 9:00 p.m. local time at the consumer's location);
- if the debt collector knows the consumer is represented by an attorney with respect to such debt and has knowledge of, or can readily ascertain, such attorney's name and address, unless the attorney fails to respond within a reasonable period of time to a communication from the debt collector or unless the attorney consents to direct communication with the consumer; or
- at the consumer's place of employment if the debt collector knows or has reason to know that the consumer's employer prohibits the consumer from receiving such communications.
- to advise the consumer that the debt collector's further efforts are being terminated;
- to notify the consumer that the debt collector or creditor may invoke specified remedies that are ordinarily invoked by such debt collector or creditor; or
- where applicable, to notify the consumer that the debt collector or creditor intends to invoke a specified remedy.30
The term "consumer" also includes the consumer's spouse, parent (if the consumer is a minor), guardian, executor or administrator.
Communications with third parties in collecting debts. Except as permitted in §1692(b) with regard to the acquisition of location information, "a debt collector may not communicate, in connection with the collection of any debt, with any person other than the consumer, his attorney, a consumer reporting agency if otherwise permitted by law, the creditor, the attorney of the creditor or the attorney of the debt collector" without the prior consent of the consumer given directly to the debt collector, or the express permission of a court of competent jurisdiction.31
Harassing or abusive conduct. A debt collector "may not engage in any conduct the natural consequence of which is to harass, oppress or abuse any person in connection with the collection of a debt."32 Specific conduct identified as violating this provision, "without limiting its general applicability," includes, but is not limited to:
- the use or threat of use of violence or other criminal means to harm the physical person, reputation or property of any person.
- the use of obscene or profane language or language the natural consequence of which is to abuse the hearer or reader.
- causing a telephone to ring or engaging any person in a telephone conversation repeatedly or continuously with intent to annoy, abuse or harass any person at the called number.
- except as provided in §1692b, the placement of telephone calls without meaningful disclosure of the caller's identity.33
Communications that are false or misleading. 15 U.S.C. §1692e provides that "a debt collector may not use any false, deceptive or misleading representation or means in connection with the collection of any debt." Specific conduct identified as violating this provision, "without limiting its general applicability," includes, but is not limited to:
- a false representation of the character, amount or legal status of any debt, or any services rendered or compensation that may be lawfully received by any debt collector for the collection of a debt.
- a false representation or implication that any individual is an
attorney or that any communication is from an attorney.
Failure to include the "actual amount" of the debt in the validation notice has been held to render it misleading and deceptive.
- a representation or implication that non-payment of any debt will result in the arrest or imprisonment of any person or the seizure, garnishment, attachment or sale of any property or wages of any person unless such action is lawful and the debt collector or creditor intends to take such action.
- a threat to take any action that cannot legally be taken or that is not intended to be taken.
- communicating or threatening to communicate to any person credit information that is known or that should be known to be false, including the failure to communicate that a disputed debt is disputed.
- the use of any false representation or deceptive means to collect or attempt to collect any debt or to obtain information concerning a consumer.
- a failure to disclose in the initial written communication with the consumer and, in addition, if the initial communication with the consumer is oral, in that initial oral communication, that the debt collector is attempting to collect a debt and that any information obtained will be used for that purpose, and the failure to disclose in subsequent communications that the communication is from a debt collector, except that this paragraph shall not apply to a formal pleading made in connection with a legal action.
- a false representation or implication that documents are legal process.
- the use of any business, company or organization name other than the true name of the debt collector's business, company or organization.
- a false representation or implication that documents are not legal process forms or do not require action by the consumer.
- a false representation or implication that a debt collector operates or is employed by a consumer reporting agency.34
The standard by which courts judge whether communications violate the Act by being false, misleading, harassing or unfair is that of the "least sophisticated consumer." Jeter v. Credit Bureau Inc., 760 F.2d 1168 (11th Cir. 1985).35
Unfair practices. The Act also prohibits debt collectors from using "unfair or unconscionable means to collect or attempt to collect any debt."36 Specific conduct identified as violating this provision, "without limiting its general applicability," includes, but is not limited to:
- collection of amounts (including interest, fees, charge or expense incidental to the principal obligation) not expressly authorized by the agreement creating the debt or permitted by law.
- the acceptance of a check or other payment instrument postdated by more than five days unless such person is notified in writing not more than 10 nor less than three business days prior to such deposit of the debt collector's intent to deposit such check or instrument.
- the solicitation by a debt collector of any postdated check or other postdated payment instrument for the purpose of threatening or instituting criminal prosecution.
- depositing or threatening to deposit any postdated check or other postdated payment instrument prior to the date on such check or instrument.
- causing charges to be made to any person for communications by concealment of the true purpose of the communication, including, but not limited to, collect telephone calls and telegram fees.
- taking or threatening to take any non-judicial action to effect
dispossession or disablement of property if—
A. there is no present right to possession of the property claimed as collateral through an enforceable security interest;
B. there is no present intention to take possession of the property; or
C. the property is exempt by law from such dispossession or disablement.
- communicating with a consumer regarding a debt by postcard.
Furnishing deceptive forms. The Act provides that it is unlawful "to design, compile and furnish any form knowing that such form would be used to create the false belief in a consumer that a person other than the creditor of such consumer is participating in the collection of or in an attempt to collect a debt such consumer allegedly owes such creditor, when in fact such person is not so participating."37 As this provision has general applicability, any person who violates this section is liable in the same manner as provided for debt collectors.38
Providing notice to the consumer and validation of debts. The Act requires debt collectors to provide debtors with written notice concerning the debt and an opportunity to dispute it within five days of initial communication (validation notice) under 15 U.S.C. §1692g:
(a) Within five days after the initial communication with a consumer in connection with the collection of any debt, a debt collector shall, unless the following information is contained in the initial communication or the consumer has paid the debt, send the consumer a written notice containing—(1) the amount of the debt;
(2) the name of the creditor to whom the debt is owed;
(3) a statement that unless the consumer, within 30 days after receipt of the notice, disputes the validity of the debt, or any portion thereof, the debt will be assumed to be valid by the debt collector;
(4) a statement that if the consumer notifies the debt collector in writing within the 30-day period that the debt, or any portion thereof, is disputed, the debt collector will obtain verification of the debt or a copy of a judgment against the consumer and a copy of such verification or judgment will be mailed to the consumer by the debt collector; and
(5) a statement that, upon the consumer's written request within the 30-day period, the debt collector will provide the consumer with the name and address of the original creditor, if different from the current creditor.
If the consumer notifies the debt collector in writing within the 30-day period that any portion of the debt is disputed, or requests the name and address of the original creditor, the debt collector is required to cease collection of the debt, or the disputed portion thereof, until obtaining verification of the debt or a copy of a judgment, or the name and address of the original creditor, and until a copy of such verification or judgment, or name and address of the original creditor, is mailed to the consumer by the debt collector.39 The failure of a consumer to dispute the validity of a debt under this section may not be construed by any court as an admission of liability by the consumer. Failure to include the "actual amount" of the debt in the validation notice has been held to render it misleading and deceptive.40 Courts have also held that provisions in a debt-collection letter implying an obligation on the part of the debtor to provide documentation to support their dispute of the debt violate §1692g(a).41
3 Under 15 U.S.C. §1692a(4), "creditor" is defined as " any person who offers or extends credit creating a debt or to whom a debt is owed, but such term does not include any person to the extent that he receives an assignment or transfer of a debt in default solely for the purpose of facilitating collection of such debt for another." The term "debt collector" is defined in the Act to include:
(a) any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts; or15 U.S.C. §1692a(6). Return to article
(b) any person who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another;
(c) any creditor who, in the process of collecting his own debts, uses any name other than his own which would indicate that a third person is collecting or attempting to collect such debts; and
(d) any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the enforcement of security interests.
10 See, also, Winterstein v. Crosscheck Inc., 149 F.Supp.2d 466 (N.D. Ill. 2001) (debt at issue did not originate with the defendant, and therefore the "originator" exemption did not apply where defendant merely facilitated debt transaction by providing estimated probability that a check would be good). Return to article
11 But, see Winterstein v. Crosscheck Inc., 149 F.Supp.2d 466, 471 n.6 (N.D. Ill. 2001) (exclusion did not apply where assignment to the defendant took place after the debt at issue was already in default). Return to article
12 The facts in Alibrandi v. Financial Outsourcing Services Inc., 333 F.3d 82 (2nd Cir. 2003), were opposite, but a similar result was reached. In Alibrandi, the debtor filed a class action against First Union's loan servicer for failure to give the FDCPA warnings in communications from the loan servicer mistakenly stating that the loan was not in default. Before transferring the loan to the servicer, First Union had retained a collection agency to collect the debt, and the collection agency had sent a collection letter to the debtor with the required FDCPA warnings. The Second Circuit held that the prior notification by the collection agency that it was a debt collector constituted a declaration that the loan was in default, that the default status of the loan was not changed by transfer of the loan to the servicer, and that even if the servicer believed the loan was not in default, the loan stayed in default status requiring the servicer to include the FDCPA statutory warnings. Return to article
35 Examples of communications that have been deemed false or misleading under the Act include use of a "priority gram," which appeared to be a telegram and thus gave a false sense of urgency. See Schweizer v. Trans Union Corp., 136 F.3d 233 (2nd Cir. 1997) (inclusion of treble damages, costs and attorneys' fees in debt validation notice (misrepresenting the actual debt owed because the debtor would not be liable for such legal penalties until the court entered a judgment); Veach v. Sheeks, 316 F.3d 690 (7th Cir. 2003) (inclusion of $20 check charge and statutory returned check penalty in amount due in validation notice on bad check as misrepresenting the "actual amount" of the debt); Armstrong v. Rose Law Firm P.A., No. Civ. 00-2287-MJD/SRN, 2002 WL 461705 (D. Minn. March 25, 2002) (enclosing an unfiled summons and complaint with a demand letter, giving the false impression that suit had been filed); Weiner v. Bloomfield, 901 F. Supp. 771 (S.D.N.Y. 1995) (a letter advising that wages could be garnished if judgment was entered, omitting other conditions required for garnishment); Seabrook v. Onondaga Bureau of Med. Econ. Inc., 705 F. Supp. 81 (N.D.N.Y. 1989). Return to article
40 See Veach v. Sheeks, 315 F.3d 690 (7th Cir. 2003) (inclusion of treble damages, costs and attorneys' fees in debt validation notice misrepresented actual debt owed because the debtor would not be liable for legal penalties until the court entered a judgment); Armstrong v. Rose Law Firm P.A., No. Civ. 00-2287-MJD/SRN, 2002 WL 461705 (D. Minn. March 25, 2002) (inclusion of $20 check charge and statutory returned check penalty in amount set forth as due on collection letter for bad check misrepresented the "actual amount" of the debt). Return to article
41 See Whitten v. ARS Nat'l. Servs. Inc., No. 00 C 6080, 2002 WL 1050320 (N.D. Ill. May 23, 2002) (letter requiring debtor to submit "suitable dispute documentation" violated this section because the section does not contain requirement that consumer notifying the debt collector it disputes debt supply "suitable documentation"); Sambor v. Omnia Credit Servs. Inc., 183 F. Supp. 1234, (D. Ha. 2002) (letter containing language suggesting that some documents might be unsuitable to dispute the debt was confusing and therefore violated the section); relying on Castro v. ARS Nat'l Servs. Inc., No. 99 Civ. 4596(HB), 2000 WL264310 (S.D.N.Y. 2000). Return to article